By Nancy Lopez

Background

Approximately 49 million nonelderly Americans are uninsured.^[1] Of those, approximately 20 percent have the financial means^[2] to buy health insurance but decide not to and instead rely on emergency care when necessary;³ the rest desire insurance but are denied coverage or cannot afford it. Even though uninsured, some individuals in the latter group receive medical services, resulting in approximately $43 billion worth of uncompensated care costs.^[4] These costs are recouped through higher charges for health care services, thereby producing a cost-shifting effect that results in higher premiums for those who are insured.^[5] This cost shift is almost exclusively borne by the private insurance market.^[6]

Approximately 14 million non-elderly Americans purchase health insurance through the private insurance market.^[7] Although the basic concept of health insurance is to spread the risk among a large pool of enrollees, the private market allows insurers to engage in exclusion practices that protect them from adverse selection but results in high premiums and limited access to coverage, especially for those individuals with a pre-existing condition.^[8] These higher premiums, in turn, create a disincentive for healthy people to buy insurance.

In an effort to significantly reduce the number of uninsured, minimize adverse selection, and increase the risk pool in the health insurance market to include healthy people,^[9] and permit health insurance reforms, the ACA requires that most individuals obtain health insurance by 2014. This brief explains the individual responsibility provision as set forth in the ACA.

Changes Made by the ACA (P.L. 111-148, §§1501, 1502 and 10106, as amended by P.L. 111-152, §1002)^[10]

Beginning in 2014, most federal income taxpayers will be required to maintain minimal essential coverage for themselves and their dependents^[11] or pay a penalty for each month in which coverage is not maintained.^[12] The penalty will be included in their federal tax return^[13] and is capped at $695.00, adjusted after 2016 for inflation.^[14]

Minimum Essential Coverage: Under this ACA provision, minimum essential coverage includes: government-sponsored programs (e.g. Medicare, Medicaid, TRICARE); eligible employer- sponsored plans (a governmental plan or any other plan offered in small- or large-group markets within a state); individual market plans; grandfathered plans; and other health coverage as recognized by the Secretaries of Health and Human Services (HHS) and Treasury.^[15] It does not include coverage of excepted benefits, such as accident- or disability-only coverage or benefits that are provided under a separate policy, such as limited scope dental or vision benefits.^[16]

Exemptions: Individuals excepted from the requirement to maintain minimum essential coverage include incarcerated individuals,^[17] individuals not lawfully present in the U.S.,^[18] individuals who qualify for a religious exemption, and individuals participating in a health care sharing ministry.^[19]

Furthermore, individuals (and their dependents) are exempt from the penalty for the months in which the following circumstances apply:

• Coverage is unaffordable, meaning that the individual’s required contribution^[20] is over 8% of household income that month.^[21] If an individual is eligible for employer- sponsored insurance (ESI) by relation to the employee (i.e., by virtue of being a spouse or dependent), affordability is determined based on the employee’s contribution.^[22] If the cost of self-only coverage is affordable under the standard, but family coverage would not be considered affordable, the employee is subject to the penalty if he or she fails to purchase coverage, but his or her dependents would not be subject to the penalty.^[23]
• The individual’s household income is under the tax filing threshold,^[24] (approximately $9,500 for an individual and $19,000 for a family in 2011).
• The individual is a member of an Indian tribe.^[25]
• The individual experiences a short lapse (i.e., less than three consecutive months), in which case the exemption is available one time during a tax year. All subsequent lapses during the same tax year are subject to the penalty.^[26]
• The individual experiences hardship with respect to the ability to obtain coverage under a qualified health plan through an Exchange or through the individual’s employer as determined by the Secretary of HHS.^[27]

Penalty: The annual penalty for failing to maintain coverage is the greater of the flat dollar amount defined in the law, or a percentage of income (described below). However, the penalty cannot exceed the national average premium for a bronze-level qualified health plan^[28] offered through the Exchange for the taxpayer’s family size for the tax year in which the penalty occurred.^[29]

• The flat dollar amount is assessed on each non-compliant taxpayer and his/her dependents. The amount will be phased in starting at $95 in 2014, $325 in 2015, and $695 in 2016 and thereafter.^[30] For calendar years after 2016, the amount will be increased for inflation and rounded to the lowest multiple of $50.^[31] The penalty for individuals under age 18 is 50 percent of the penalty that would have otherwise been charged.^[32] The total amount of the penalty for a family is capped at 300% of the annual flat dollar amount (e.g., for 2014 the cap is 3 x $95).^[33]
• The percentage of income is calculated as the percentage of the amount by which the taxpayer’s household income exceeds the taxpayer’s filing threshold. The percentages are 1% for tax years beginning in 2014; 2% for those in 2015; and 2.5% for years beyond 2015.^[34]

If a taxpayer claims an applicable individual as a dependent, the taxpayer is liable for the penalty imposed on the dependent.^[35] Married taxpayers filing jointly are each liable for a penalty imposed on either one of them.^[36]

Enforcement: The penalty must be paid upon notice and demand of the Secretary of Treasury and is assessed and collected in the same manner as assessable penalties under subchapter B of Chapter 68 of the Internal Revenue Code (IRC). However, taxpayers are not subject to any criminal charges for failure to pay the penalty^[37] and the Internal Revenue Service cannot impose a levy or lien against the taxpayer to collect any unpaid penalties.^[38]

Reporting: Any person who provides minimum essential coverage for any individual must file a return with the Secretary of Treasury containing the following: name, contact information, and tax identification number of primary insured and dependents; the period of coverage; whether coverage is through a qualified health plan offered through the Exchange; whether any subsidies were paid; what portion of the premium was paid by the employer if coverage is through a group plan; and any other information deemed necessary by the Secretary of Treasury.^[39]

Implementation

Agency

Both the Department of Health and Human Services (HHS) and the Department of Treasury are involved in implementing the individual responsibility and reporting requirements.

Key Dates

The individual responsibility requirement under ACA §1501 will begin January 1, 2014, with penalties payable by April 15, 2015.

Process

The Departments of HHS and Treasury have the discretion to use a range of tools to implement the statute, such as publishing regulations in the Federal Register with a public notice and comment period, or using other types of approaches such as posted policy instructions, official letters to affected entities (such as letters to state Medicaid agencies), and posted rulings and notices. Agency websites can be checked regularly for updates.

Key Issues

• What is the definition of a “month” with regard to assessment of the penalty? What does “hardship” mean? What is “affordability” measured against in the private insurance market – self-coverage or family coverage? Who will determine eligibility for exemptions?
• How will the collection of penalties be administered, if at all? Will IRS have the staff needed to implement this requirement? Who will verify income changes throughout the year or coverage gaps? Who will verify the hardship exemption? How will affordability under the individual requirement coordinate with affordability under the employer responsibility requirement?
• How will the IRS raise the penalty after 2016? How will the requirement to obtain health insurance be enforced to the degree that individuals comply? Is the requirement constitutional?

Agency Action

No action as of the time of this posting.

Authorized Funding Levels

This change is regulatory in nature and therefore does not direct the award of federal funds.